12.3 National and international standards
Accounting standards are rules for preparing financial statements. They lead logically to auditing standards which specify the rules for performing an audit. These rules become legal requirements and the following national standards illustrate clearly how cross-country accounting can be an accountant's nightmare. The examples are from page 650 inyour textbook.
- The Netherlands uses current values for replacement of assets; Japan uses historic cost.
- Capitalisation of financial leases is required in Britain , but not in France .
- R&D costs are written off in the year they are incurred in the US ; R&D costs in Spain need not be written off as long as benefits arising from the R&D continue.
- In Germany , depreciation is treated as a liability; in Britain , depreciation is deducted from assets.
Activity 12.1
Make a list of the standards in Australia regarding:
- asset replacement;
- capitalisation of financial leases;
- accounting for R&D costs; and
- depreciation.
To complete this activity, you may wish to visit http://www.aasb.com.au/ , the home of the Australian Accounting Standards Board
It should be obvious to you that different national accounting standards would matter little if international businesses reported their financial results in only one country. However, the concepts of the global market and transnational financing and investment are incompatible with one-country reporting. Note that transnational financing occurs when a firm such as Pacific Dunlop, based in Australia , enters the capital market of the US to sell its shares through the New York Stock Exchange. Transnational investment occurs when an investor such as Australia's AMP (an insurance/wealth management MNE) enters the capital market of another country such as Papua New Guinea to invest in the shares of a firm based in that country (for example, the Porgera Gold Mining Company).
Think about the financing reporting requirements of these two examples:
- In addition to its Australian financial reports, Pacific Dunlop raising capital in the US must issue financial reports that serve the needs of its American investors.
- The Porgera Gold Mining Company might not have too much difficulty in reporting to its Australian investors (AMP) because Papua New Guinea 's accounting system is similar to the Australian system. It would be a different mater if the AMP invested in a gold mine in Indonesia , where the accounting system is based on that of the Netherlands .
Difficulties of cross-country financial reporting have, not surprisingly, led to attempts to harmonise accounting standards and procedures worldwide. The detail of these efforts is covered by Hill (2005, pp. 651-654) but the main points are:
- The European Union (EU) is harmonising accounting to promote the free flow of capital by means of directives. These are EU laws which member states are required to incorporate in their own national laws (directives were mentioned in Chapter 6 of this unit).
- The International Accounting Standards Board (IASB), which was initially formed in 1973 as the International Accounting Standards Committee, has the responsibility of developing new international financial reporting standards. As from 1 January 2005 , new international accounting standards came into effect, the implementation of which has been fraught with confusion over interpretation of the standards.
In addition to Hill 2005, read the following newspaper articles that discuss the implementation issues, provide a timeline of the adoption of the new standards, and explain the major changes.
In your text
Hill 2005, Chapter 19, pp. 645-654.
Reading 12.1
Lee, T. and Buffini, F. 2005, 'Accounting regulators clash on rules', Australian Financial Review , 11 January, pp. 1 and 6.
Reading 12.2
Buffini, F. 2004, 'ASIC pleased with efforts on accounting rules', Australian Financial Review , 23 November, p. 3.
Reading 12.3
Buffini, F. 2005, 'Merger differences still to continue', Australian Financial Review , 11 January, p. 6.
Reading 12.4
Fenton-Jones, M. 2005, 'Smaller firms face standards pressure', Australian Financial Review , 11 January, p. 6.
Reading 12.5
Lee, T. 2005, 'AASB will have to play another role', Australian Financial Review , 11 January, p. 6.
In the next section we look at how MNEs deal with the issue of cross-country financial reporting.
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